The time has arrived for revenue recognition adoption. Starting Jan. 1, 2017, all calendar year entities can elect to early adopt the changes announced under the Financial Accounting Standards Board (FASB)'s accounting standards update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC Topic 606). Regardless of whether your organizations takes advantage of early adoption, implementation plans should be underway in 2017. All calendar year public business entities must adopt ASC Topic 606 by Jan. 1, 2018. All other entities must adopt the new standard by Dec. 31, 2019. Regulators will be looking for progress toward adoption much sooner; a recent U.S. Securities and Exchange Commission (SEC) staff comment asks that SEC registrants include their progress on revenue recognition as part of their year-end filing statements. Transitioning to ASC Topic 606 will not be easy; it has a wide effect on operations and will require an overhaul of existing procedures and processes surrounding revenue streams. Organizations that ensure the following elements are part of its implementation strategy can ensure they are meeting their requirements for the new standard.

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A publication of the Professional Standards Group
December 2016
5 Keys to Beginning Revenue Recognition Implementation
The time has arrived for revenue recognition adoption.
Starting Jan. 1, 2017, all calendar year entities can
elect to early adopt the changes announced under
the Financial Accounting Standards Board (FASB)’s
accounting standards update (ASU) 2014-09,
Revenue from Contracts with Customers (Topic 606)
(ASC Topic 606).
Regardless of whether your organizations takes
advantage of early adoption, implementation plans
should be underway in 2017. All calendar year public
business entities must adopt ASC Topic 606 by
Jan. 1, 2018. All other entities must adopt the new
standard by Dec. 31, 2019. Regulators will be looking
for progress toward adoption much sooner; a recent
U.S. Securities and Exchange Commission (SEC)
staff comment asks that SEC registrants include their
progress on revenue recognition as part of their year-
end filing statements.
Transitioning to ASC Topic 606 will not be easy;
it has a wide effect on operations and will require
an overhaul of existing procedures and processes
surrounding revenue streams. Organizations
that ensure the following elements are part of its
implementation strategy can ensure they are meeting
their requirements for the new standard.
1. Capture the 10,000-Foot Impact of the
Standard on Your Operations
Revenue recognition under ASC Topic 606
can affect everything from human resources to
accounting, finance, treasury, legal and human
resources. Putting together a cross-functional
team to evaluate where revenue recognition will
have an impact is essential.
Certainlysalescontractsandtheresultingrevenues
will see the greatest impact. Although analyzing
the contracts will require a detailed review at a
high level, start by evaluating the broad impacts.
Will revenue be deferred or accelerated compared
to recognition today? This may occur for multiple
reasons, including evaluating when transfer
of control occurs, how revenues are allocated
among performance obligations, how revenues
are measured and the changes in the accounting
for variable consideration. Will the accounting
require tracking of additional sources of revenue
in the form of performance obligations that are not
currently accounted for as deliverables?
Entities should also consider whether adopting
the revenue recognition standard will affect non-
sales contracts, such as loan covenants. If timing
of revenue recognition is going to change, it could
affect EBITDA and working capital. Revised
definitions of accounts receivable and contract
assets could have an impact on your borrowing
base. Sales commissions, bonus plans and stock-
based compensation could also be affected by
changes in the timing, allocation, or amounts of
revenue.
If your cross-functional team is aware of all the
elements that may be complicated by revenue
recognition, it can have a better sense of what
the implementation project will require of internal
resources. It also can identify the changes that
may need to be communicated to external parties,
such as investors.

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MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that is a member firm of Kreston International Limited, a global network of independent accounting firms.
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2. Perform a Deep Dive of Existing Contracts
ASC Topic 606 will require every contract to be
reevaluated. Using an evaluation tool for portfolios
of contracts that have similar terms or for each
identifiedrevenuestreamcanexpeditetheprocess.
Before using any evaluation tool, however, be sure
to discuss your plan with internal and external
stakeholders, including your organization’s auditor.
This step will help verify that the evaluation tool
adequately demonstrates ASC Topic 606’s impact
on existing contracts and contract processes.
You should also understand the specific contract
terms and how they are impacting revenue
recognition. This may include involving an attorney
to understand the legally enforceable rights and
obligations under the contract. Numerous issues
that are unexpected could arise from the deep
dive into contracts, including the identification of
significant judgments that must be made. Such
judgments might include measuring variable
consideration, deciding on the correct input or
output method for recognizing revenue recognized
over time or evaluating unique industry challenges.
In many cases when the rubber hits the road
of evaluating the specifics of contract, a re-
evaluation of the 10,000-foot impact may need
to be performed as different aspects of the new
guidance are discovered. For example, retailers
may discover they have issues to account
for related to breakage of gift certificates. A
franchisor might uncover challenges with the
recognition of initial franchise fees that may
be recognized at a later date under ASC Topic
606, depending on the facts and circumstances
involved. Brokerage firms or claims processors
may find that their contracts contain more
performance obligations that in current U.S. GAAP.
3. Select a Transition method and Develop an
Implementation Plan
Entities have two options for transitioning to the
new standard, a retrospective and a modified
retrospective approach.
Afull-retrospectiveapproachrequiresorganizations
to implement the standard for all periods presented
in their financial statement in the year of adoption.
If an organization adopts ASC Topic 606 in 2019
and does two-year comparative statements, it must
report both 2019 and 2018 financial statements
using ASC Topic 606. Disclosures of changes
would be required for the 2018 financial statement.
If choosing a retrospective approach, the timing
and cost of preparing the accounting and auditing
the changes to the prior year will be something to
factor into the implementation plan.
A modified retrospective approach requires entities
to take a cumulative period adjustment on its
opening retained earnings in the year of adoption.
On the surface, the modified retrospective
approach may be more attractive because the
retrospective approach will require revising the
historical financial information and re-audit of prior
year financial statements.
But the modified retrospective transition has its
own set of considerations. In the year of adoption,
entities must disclose what revenue would have
been under previous U.S. GAAP (using ASC Topic
605) versus using ASC Topic 606. The disclosure
essentially requires the entities to go through
their financial statement reporting twice. The
process will need to be documented to support the
conclusion reached and the disclosures audited.
Other concerns may include the “lost revenue”
issue, which may occur when the adoption of Topic
606 results in the acceleration of revenue. When
this occurs, deferred revenue under Topic 605 that

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MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that is a member firm of Kreston International Limited, a global network of independent accounting firms.
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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please
contact your MHM auditor to further discuss the impact on your audit or audit report.
would have been recorded in prior periods under
Topic 606 is removed from liabilities and recorded
as an adjustment directly to retained earnings. As
a result, an entity using the modified retrospective
approach may experience a sudden decrease in
revenues in the year of adoption relative to the
prior period.
Organizations could also incur “double expenses.”
Take the following example. A software vendor
pays commission based on expenses and
recognizes the expense up front in 2018. It then
adopts ASC Topic 606 for 2019. Under ASC
Topic 606, if the license is longer than a year,
commission would be recognized over the term
of the license, which means a portion of those
expenses would be pulled out of retained earnings
and recognized again in 2018, thus resulting in
the expense being recognized twice in a single
set of financial statements under the modified
retrospective approach.
4. Disclosures
Disclosures will also experience significant
change. As part of the implementation plan
consider what additional information will be
required to be disclosed. For public business
entities, many of these disclosures will include
significant disaggregated quantified information.
For private companies, the disclosures are
reduced by comparison but significantly more then
what is disclosed under current guidance.
Evaluating disclosure needs may also have a
greater impact on the internal systems of your
company. Ask, do systems currently gather
sufficient information, disaggregated by revenue
stream, to meet the disclosure requirements in
Topic 606?
5. Control Environment Updates
Controls should be in place for everything from
pulling reliable data from past financial periods to
the consideration of the new revenue recognition
standard’s impact on fraud risk.
There may be more judgment involved under ASC
Topic 606 than previous U.S. GAAP. If a contract
is determined to have variable consideration, for
example, determining the variable consideration
requires a degree of estimation. Internal controls
should be able to demonstrate the process used to
estimate variable consideration is reliable.
Ensuring that the changes made to the control
environment and to reporting functions are
transparent can also streamline your audit process.
Seek Help If Needed
Working with a provider that understands the standard
and the potential ripple effect it could have on the
various components of your operations may expedite
the transition process. For more information on how to
get started with revenue recognition adoption, please
see our webinar or contact Mark Winiarski, Brad Hale
or James Comito of MHM’s Professional Standards
Group. Mark can be reached at mwiniarski@cbiz.com
or 816.945.5614. Brad can be reached at bhale@
cbiz.com or 727.572.1400. James can be reached at
jcomito@cbiz.com or 858.795.2029.